Explore the methodology and mechanics of trades anchored around a core position. This approach allows a short-term and long-term view of the same stock.
Once you have your core position established, it's time to decide what criteria you’ll use to potentially trade around it. There is no right or wrong way to approach this, but most of the trade triggers you’ll use will be based on time or events.
When trading around a core position, you’re essentially trading two different time frames simultaneously: the long-term and the short-term. And that means one of the best indicators is a moving average.
There are three standard moving averages commonly used to represent short-, intermediate-, and long-term time frames—the 20-day moving average, 50-day moving average, and the 200-day moving average. So, for example, you might trade around a core position by playing the 20-day moving average against the 200-day moving average.
Let’s say you buy more of a stock when it breaks below its 20-day moving average but stays above its 200-day moving average. You’re trying to take advantage of a stock that exhibits short-term weakness—represented by the drop under the shorter of the two moving averages—while still continuing in a longer-term uptrend, supported by the fact that it’s still above the longer moving average.
Events—earnings announcements, new product launches, boardroom reshuffles, and so on—are another trigger that you can use to initiate satellite trades around your core position, although they’re less objective than indicators or studies.
Events tend to create short-term distortions in a stock's price that can potentially be exploited to your benefit. For instance, suppose your stock were to gap higher, getting ahead of itself after a surprise upside earnings announcement. You could take advantage of this temporary price spike by selling part of your core position with the idea of buying those shares back when the price settles down.
The opposite holds true for events that temporarily exaggerate price to the downside. Those can be opportunities to pick up a stock at a cheaper price point. You can then potentially unload it if the price recovers.
It's important to note that when a stock makes an extreme move because of an unexpected event, you shouldn’t necessarily expect the price to retrace completely. So it might be a case of selling part of your core position when a stock jumps from $100 to $110, for example, with an eye to buying it back around $105.
Just because you have a long-term outlook on your core position doesn't mean that you can ignore risk management on your satellite trades. In fact, satellite trades that go too far against you can be a warning sign that your core position should be reevaluated.
If the short-term price action damages the long-term outlook for your stock, you should consider closing out your entire position. Otherwise your short- and long-term positions (and trades) are no longer working together, but against each other.
TD Ameritrade offers trading access at many levels, from device-optimized mobile apps to the professional-grade platform thinkorswim®.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.